Why Are Shorts Increasing Their Positions In These 3 Patent Plays?

Many people like to follow what the "big money" institutional and hedge funds are buying, selling and shorting. So I began looking over some patent companies that have made some big noise lately. These companies are Vringo Inc. (NASDAQ:VRNG), VirnetX Holding Corp. (NYSEMKT:VHC), and ParkerVision Inc. (NASDAQ:PRKR).

For new investors out there, short interest is an indicator of what short sellers think about a particular stock. If short interest increases, then shorts are betting that the price of the stock will be going down. However, if short interest decreases, then shorts are betting that the price of the stock will be going up.

Many investors use short interest to make predictions about the direction of a particular stock and to measure the bullishness or bearishness of it. Below is a table of the short interest increases of the following companies.

Settlement Date

Vringo

VirnetX

ParkerVision

2/15/2013

15,664,955

15,851,472

16,580,320

1/31/2013

14,727,848

15,705,388

16,409,547

1/15/2013

14,135,064

15,033,619

16,146,528

12/31/2012

12,788,985

15,099,485

16,200,038

*Data from Nasdaq.com

As you can see from the table above, short interest has been increasing in these stocks. So why are shorts increasing their positions? There could be many different reasons as to why, so a good question to ask yourself in this situation is what do the shorts know that you don't. Let's take a look at the companies to see what has transpired for the rise in short interest.

Vringo, Inc.

Vringo operates together with its subsidiaries, engages in the innovation, development and monetization of its mobile technologies as well as its intellectual property. Vringo has a market cap of $242 million with its recent closing price of $3.02 and its book value stands at $1.39.

Vringo's short interest has steadily been increasing since August of 2012. On August 15, 2012, Vringo had short interest of 4.03 million shares. As of February 15, 2013, Vringo's short interest has risen to 15.6 million shares representing a whopping increase of 11.6 million shares.

On November 6, 2012, the jury unanimously returned a verdict award for Vringo amounting to $30.5 million in respect to past damages by the defendants' infringements commencing from September 15, 2011. It was also confirmed that Vringo would also be compensated by Google (NASDAQ:GOOG), with a running royalty rate of 3.5% through 2016. Estimates have royalties in the range of $635 million that Vringo would be receiving. So why have shorts been piling it on Vringo after its win in which Google was found liable for infringing on Vringo's patents?

The long duration between the verdict, post trial motions and post trial results has been Vringo's silent killer. The uncertainty of what could and will likely take place in post trial motions has shaken many investors out. Because of this, shorts have taken control and have driven down the price of the stock.

VirnetX Holding Corp.

VirnetX develops software and technology solutions for securing real-time communications over the Internet. VirnetX's software and technology solutions includes domain name registry and GABRIEL Connection Technology, which provide security platform for Internet-based applications, such as instant messaging, Voice over Internet protocol, mobile services and streaming video. VirnetX has a market cap of $1.76 billion with its recent closing price of $34.38, and has $46 million in cash with no debt.

VirnetX's short interest has steadily been increasing ever since November of 2012. On November 15, 2012, VirnetX had short interest of 15 million shares. As of February 15th 2013, VirnetX's short interest has risen to 15.8 million shares representing an increase of close to a million shares. So why are shorts still pilling on VirnetX?

After the jury awarded VirnetX $368 million in its case against Apple (NASDAQ:AAPL), shorts hoped that the court would reverse a sizable judgment award in the lawsuit that ended in VirnetX's favor.

On February 27, 2013, a federal court in Texas upheld the $368 million jury award for VirnetX after it sued Apple Inc. for infringing on four of its patents. VirnetX said the court denied Apple's request for a new trial and a motion to reduce the damages. The court also denied VirnetX's request for a permanent injunction on the sale of certain Apple products and ordered both sides to come to a licensing agreement for future use of its technology in the next 45 days.

"We are extremely pleased with the court's order in our suit against Apple," said VirnetX CEO Kendall Larsen in a statement. "We look forward to negotiating a license with Apple that includes an ongoing royalty agreement."

It will be interesting to see what the short interest numbers are like now after that announcement was made. Will shorts be exiting their positions now that negations between Apple and VirnetX will be taking place? We shall see.

ParkerVision Inc.

ParkerVision engages in the design, development, and marketing of proprietary radio frequency [RF] technologies and products for use in semiconductor circuits for wireless communication products in the United States. ParkerVision has a market cap of $326 million with its recent closing price of $3.94, and has $13.36 million in cash with 39K in debt.

ParkerVision's short interest for the most part has steadily been increasing for over a year now. On March 15, 2012, ParkerVision had short interest of 6 million shares. As of February 15th 2013, ParkerVision's short interest has risen to 16.5 million shares representing a whopping increase of over 10 million shares.

On February 20, 2013, the United States District Court for the Middle District of Florida issued its patent claim construction ruling, or "Markman Order," in the ongoing patent infringement action between ParkerVision and Qualcomm, Inc. (NASDAQ:QCOM). In the Markman Order, the Court adopted ParkerVision's position as to the proper interpretation of most of the key terms in dispute in the litigation. Shares of ParkerVision jumped from $2.43 to $4.21 after the Markman order.

Jeffrey Parker, Chairman and Chief Executive Officer of ParkerVision stated, "We are pleased with the Court's Markman Order and we are confident in our position concerning Qualcomm's infringement of the patent claims at issue in this case."

Conclusion

Because these are speculative stocks with high short interest, investors can be sure to count on lots of volatility and wild price swings. Investors are always reminded that before making any investment, you should do your own proper diligence on any stock mentioned in this article. Any material in this article should be considered general information, and not relied on as a formal investment recommendation. I hope this article was helpful to you and I look forward to all of your comments and insight.

Disclosure: I am long VRNG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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